UT Neutral Citation Number: 2014 UKUT 0476 (LC)

UT Neutral citation number: [2014] UKUT 0476 (LC)

UTLC Case Number: RA/37/2013

TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

RATING – valuation – offices – treatment of internal staircase installed by tenant – rebus sic stantibus –definition of net internal area –tenant’s improvements - minor works – Appeal dismissed

IN THE MATTER OF AN APPEAL AGAINST A DECISION OF

THE VALUATION TRIBUNAL FOR ENGLAND

BY

IAN PHILIP MANNING

(VALUATION OFFICER)Appellant

re:Part 3rd, 4th and 5th floors

Park House, 16 Finsbury Circus, London EC2M 7DJ

Before: P R Francis FRICS

Sitting at:43-45 Bedford Square, LondonWC1B 3AS

on

7 August 2014

Jonathan Davey of counsel, instructed by HMRC Solicitors, for the appellant VO

1

The following cases are referred to in this decision:

John Laing & Sons Ltd v Kingswood [1949] 1 KB 344

Gilbert v S Higginbottom & Sons [1956] 2 QB 40

Edma (Jewellers Ltd) v Moore (VO) [1975] RA 343

Williams (VO) v Scottish & Newcastle Retail Ltd [2001] EWCA Civ 185

Wilson-Smith v Attrill (VO) [2011] UKUT 287 (LC)

Johnson v H&B Foods Ltd [2013] UKUT 0539 (LC)

DECISION

Introduction

1. This is an appeal by Ian Philip Manning (the appellant Valuation Officer), from a decision of the Valuation Tribunal for England (VTE) dated 26 June 2013 which allowed an appeal by the ratepayer, Bloomberg LP (Bloomberg) after reducing the assessment in the 2010 non-domestic rating list on “part 3rdfloor, 4th and 5thfloors, Park House, 16 Finsbury Circus, London EC2M 7DJ” (the hereditament) from £1,700,000 to a rateable value (RV) of £1,440,000. The material and effective dateswere 6 June 2011.
2. The ratepayer, Bloomberg LP, which was the appellant before the VTE had, by its agent GVA on 18 August 2011, made a proposal to alter the rating list to £1.00 because, for three reasons, the assessment was deemed excessive. The extent of the disability and the effect of the first two reasons (that the assessment did not reflect ongoing construction works to the adjacent property, 12–15 Finsbury Circus, and the Crossrail works being undertaken at Finsbury Circus) were agreed by the VO and this would have had the effect of reducing the assessment to £1,450,000. The third reason, which would, the parties agreed, have reduced the assessment by a further £10,000,related to whether the net internal area (NIA) occupied by a private internal staircase constructed by the ratepayerbetween the three floors should be removed from the assessment. That was the principal issue considered by the VTE at a hearing on 22 May 2013, and it concluded that, in accordance with the appellant ratepayer’s case, the NIA of the staircase should be excluded.The VTE also considered an argument by the respondent VO that, if the floor area of the staircase was to be excluded, should there instead be an end-adjustment on the basis that the staircase constituted a tenant’s improvement.
3. Mr Jonathan Davey of counsel appeared for the appellant.The appellant gave expert valuation evidence as the duly appointed Valuation Officer.
4. Although it was accepted by the VO that the amount in issue before me is small, Mr Davey pointed out in his skeleton argument that the issue has “a significance that potentially goes beyond the four corners of the instant facts,”and there was a risk that if the VTE decision was not challenged, it would be “invoked by ratepayers in other cases where the proper treatment of tenants’ alterations is in question.” Presumably recognising that this was effectively a “test case”, Bloomberg confirmed by letters from its agent dated 16 August and 10 September 2013 that due to the potentially significant and disproportionate costs involved it would not be responding to the appeal, and would thus not be taking any part in the proceedings.

Facts

1. From the evidence, I find the following facts. The appeal hereditament (as defined in the 2010 rating list) comprises part of the third, and the whole of the fourth and fifth floors (apart from communal spaces such as stairwells and lift/service cores) within Park House, 16 Finsbury Circus EC2M 7EB. Park House is an imposing period building, originally constructed in the 1920s and substantially refurbished in the late 2000s to provide grade A office accommodation behind a retained classical stone façade. The building, which is now multi-let, was listed Grade II in 1977. The office floors are served by six 24 person passenger lifts, a goods lift and a fire lift, and each floor has male and female WCs. There is also an original centrally located common staircase with further staircases provided to the north-west core and one on the east side.
2. The hereditament is located on the north-eastern quadrant of Finsbury Circus in the City of London between Moorgate and Liverpool Street under and over-ground stations and to the north of London Wall.
3. The ratepayer is tenant of the entirety of the third, fourth and fifth floors (apart from the service and access cores) under the terms of three 10 year leases that also include a basement store. All the demised offices were let as Category A which provided principal services, raised floors and suspended ceilings allowing for fitting out to the occupier’s requirements (to Category B). The fourth and fifth floors, together with a small area comprising two meeting rooms on the third floor were, at the material day, fitted out to Category Band occupied. They comprised a “U” shape around the building’s main central ‘core’ containing lifts, services and an atrium/light-well together with WCs. The fourth floor also had a reception area (that being the only public access), kitchen and staff ‘break-out’ area. The demised part of the third floor which remained to be fitted out to category B was unused by the ratepayer, andwas not included within the assessment.
4. The fitting out works undertaken by Bloomberg before they took occupation (6 June 2011) included the provision, principally for security purposes, of an internal staircase to contain movement within the demised floors, and to prevent staff having to exit the secure floors to the communal core to move between them. It was installed with landlord’s consent, but not pursuant to any obligation, other than to reinstate at the end of the term or upon the exercise of a tenant’s break clause, and was not subject to any resulting adjustment to the passing rent (although it would be taken into consideration at the first rent review). Due to the fact that the doors that formerly gave access on to the communal core (other than those leading into the fourth floor reception area) became fire-escape doors, and from the outside were permanently locked, the new staircase thus became the only internal means of access between the floors. The total floor area occupied by this staircase, over the three floors it serves, was agreed at 55.07 sq m (1.20% of the total office area demised), and it was in place and in use at the material day.
5. The overall net internal floor areas of the hereditament, both with and without the staircase, together with the area of the currently unoccupied part of the third floor were also agreed between the parties before the VTE, and the main office rate was agreed at £370 per sq m.

The VTE decision

1. The two issues considered by the VTE in its decision of 26 June 2013 were (1) whether the floor area occupied by the internal staircase should be included or excluded from the net internal floor area and (2), if it were to be excluded, should it instead be, as argued by the respondent VO, reflected in the valuation as an end-adjustment for tenant “alterations/stairs” ofplus1.20%? This allowance was not justified by any consideration of the value added by the staircase but was a purely arithmetical addition reflecting the fact that the area of the staircase amounted to 1.20% of the total floor area (including the unused part of the third floor). It was noted by the VTE that whichever approach was adopted, the VO’s assessment (at an additional £10,000) was the same. The 1.20% allowance referred to actually produced, on the agreed £370 psm for office space, an increase of £20,376 but the VO did not proposemore than a £10,000 addition for the effect of the staircase.
2. In this regard, the VTE said, at paragraph 8 of its decision:

“The respondent’s representative provided an alternative valuation to that set out in his statement of case. In this valuation he had removed the floor area of the staircase from the net internal area but had made an end adjustment for ‘tenant alteration/stairs’ of plus 1.20%. The resultant ‘rounded’ rateable value was the same as that sought in his statement of case. In accordance with Practice Statement – Non-Domestic Rates (Rating List 2010): Disclosure & Exchange – VTE/PS/A7-1 8 November 2011 [Effective from 1.1.12], the Panel considered that this alternative valuation should be allowed as it did not alter the revised rateable value being sought by the Respondent’s representative, it just amended how he had reflected the presence of the staircase in his valuation.”

1. The VTE,which recorded the hereditament as being part of the third floor, together with the fourth and fifth floors at Park House, said that having considered the parties’ evidence and submissions, it understood the subject hereditament had been measured to net internal area (NIA) in accordance with the RICS Code of Measuring Practice, 6th edition. It noted the ratepayer’s argument that section 3.14 of the Code specifically states that stairwells, lift-wells and permanent liftlobbies should be excluded, and the contention that the “rebus sic stantibus” rule in conjunction with the Local Government Finance Act 1988 required that matters affecting the physical state or enjoyment of the hereditament were to be taken to reflect the premises as they were at the material day – by which time the staircase had been constructed. The VTE also noted the VO’s opposing view as to the interpretation of the Code by his reference to section 3.6 which says that ramps, sloping areas and steps within usable areas should be included, and that under section NIA5 it is not normally appropriate to exclude space within the demise which has been converted by a tenant to any of the exclusions listed. It was also noted that the VO had argued in the alternative that if it were to be held that the area should be excluded, it should be taken to be an improvement and reflected as such in the assessment.
2. The VTE referred to the references made by the parties to the treatment of other hereditaments, and said in its conclusions:

“20. Having considered all the evidence presented, the Panel finds that the weight of the evidence supports the Appellant’s representative’s contention that, in the subject case, the area of the staircase should be excluded from the NIA in accordance with the definitions set out in the 6th edition of the RICS Code of Measuring Practice. The Panel agrees that the subject heraditament should be valued in accordance with the “rebus sic stantibus” rule and at the material day the staircase was physically in existence. The panel did not consider the staircase to be a temporary structure as its removal would require substantial structural alteration to the three floors.

21. Whilst the Panel accepts that the staircase enables direct intercommunication between the three floors it was not satisfied that evidence of any weight had been provided to support the Respondent’s representative’s contention that if the area of the staircase is taken out of the NIA, because it is a tenant’s improvement, it should be reflected in the valuation as an end adjustment to reflect this fact.

22. In conclusion the appeal is allowed and the Panel determined the revised rateable value of RV £1,440,000.”

The RICS Code of Measuring Practice (the Code)

1. It was common ground between the parties before the VTE that the measurement of the appeal hereditament should be based upon the sixth edition of the Code which was effective from September 2007. The purpose of the Code is stated to be “to provide succinct, precise definitions to permit the accurate measurement of buildings…on a common and consistent basis.” Its status is described as a Guidance Note which “provides advice to Members of the RICS on aspects of the profession. Where procedures are recommended for specific professional tasks, these are intended to embody ‘best practice”, and states that “Members are not required to follow the advice and recommendations contained in the Note.”
2. The definition of NIA falls within section 3 of the Code which so far as relevant to this appeal provides:

“3.0 Net Internal Area (NIA)

Net Internal Area is the usable area within a building measured to the internal face of the perimeter walls at each floor level (See note NIA 3)

Including

…

3.6Ramps, sloping areas and steps within usable areas

…

Excluding

…

3.14Stairwells, lift-wells and permanent lift lobbies

Applications (when to use NIA)

…

APP 10Rating – NIA is the principal basis of measurement for rating of shops, offices….)

…

Notes (How to use the NIA)

…

NIA 5Advice – when dealing with rent reviews or lease renewals, the exclusions are generally intended to relate to the premises as demised. Unless otherwise indicated by statutory provision or the terms of the lease, it will not normally be appropriate to exclude demised usable space which has been subsequently converted by a tenant to any of the exclusions listed.

…”

Issue

1. The principal issues before me are the same as those considered by the VTE – that is, firstly, whether or not the space occupied by the staircase installed by the tenant between the third, fourth and fifth floors should be included within the NIAand secondly, if the space is to be excluded when determining the NIA, the contribution which the staircase itself makes to the rental value of the hereditament ought nonetheless to be reflected in an additional allowance. Before me, a further alternative approach was argued, that being that even if I find against the appellant on both of these alternatives, then the “doctrine of minor works” applies and the area in question is to be valued as offices as if the staircase had been removed.
2. I was also asked to consider a subsidiary issue which was, it was admitted by the appellant, not before the VTE. That was whether the hereditament should be described in the rating list as comprising the entirety of each of the three floors (as contended for by the VO), or whether the part of the third floor not currently used by Bloomberg should continue to be excluded (as recorded by the VTE and as per the current entry in the rating list). It was submitted that the fact this issue was not before the VTE does not prevent this Tribunal from considering it – see regulation 42(5) of the Appeal Regulations 2009 and Johnson v H&B Foods Ltd [2013] UKUT 0539 (LC) from para 60.
3. I consider the subsidiary issue first, that matter being the subject of legal submission.

The case for the appellant VO

The extent of the hereditament

1. In the appellant’s statement of case, dated 13 December 2013, it was contended that the hereditament is more extensive than the VTE took to be the case. It was submitted that section 64(1) of the Local Government and Finance Act 1988 (LGFA 1988) defines a hereditament as “anything which, by virtue of the definition of a heriditament in section 115(1)of the General Rate Act 1967 (GRA 1967), would have been a heraditament for the purposes of that Act had this Act not been passed.” Section 115(1) of the GRA 1967 defined a hereditament as “…property which is or may become liable to a rate, being a unit of such property which is, or would fall to be, shown as a separate item in the valuation list.”
2. Therefore, it was submitted, on a proper analysis a hereditament constitutes a unit of land that falls to be assessed separately for rating purposes. Where it is not clear whether particular premises constitute one, or more than one, hereditament the proper approach is to take a common sense view, taking into account all relevant factors including whether the premises form a single geographical unit (see Gilbert v S Higginbottom & Sons [1956] 2 QB 40 at pages 53 and 54). The concept of “hereditament” is inextricably linked to the notion of rateable occupation. The Court of Appeal articulated the four necessary ingredients that must be present for there to be rateable occupation in John Laing & Sons Ltd v Kingswood[1949] 1 KB 344 at 350 as:

“First, there must be actual occupation; secondly, that it must be exclusive for the particular purposes of the possessor; thirdly, that the possession must be of some value or benefit to the possessor; and, fourthly, the possession must not be for too transient a period.”

1. In applying those principles to the present case, it was submitted that Bloomberg is the tenant of the entirety of the three floors (except for the common parts) under leases that have several years to run. The mere fact that Bloomberg chooses not to use part of the third floor as functioning office space is nothing to the point. It is in actual occupation, it does have exclusive possession of the area in question, that possession is of benefit to it and its possession is not for too transient a period. Mr Manning said in his report that, whilst it was accepted that the Category A space could not be used to its full potential until it had been upgraded by Bloomberg, it was only separated from the rest of the third floor by floor to ceiling glass panels that would be easily removable. The unused space also, importantly, provides the means of emergency access and egress, without which the upgraded part of the floor could not be occupied.
2. It was suggested that the appropriate position to be adopted by the Upper Tribunal was as set out in these submissions, and not as adopted by the VTE.
3. It occurs to me that the VTE did not “adopt a position” as far as the extent of the demise is concerned. The matter was not in issue, and no argument was put forward to suggest that the extent of the hereditament was anything other than as set out in the rating list entry. Indeed, Appendix IPM 10 to Mr Manning’s expert report sets out the VTE valuation where the demise of the third floor is stated as 163.91 sq m (which relates only to the Category B accommodation then in use by Bloomberg (excluding 9.23 sq m of stair space on that floor))and makes no mention of the remaining 2,065.74 sq m of unused Category A space.
4. Furthermore, whilst I accept that it may be appropriate in some circumstances to permit the appellant to argue new points, the question relating to the jurisdiction of the Upper Tribunal in respect of hearing appeals from the VTE and the Valuation Tribunal for Wales (VTW) having been, as was pointed out, considered at considerable length by the President and Mr A J Trott FRICS in Johnson,(although the circumstances of that case were markedly different), and confirmation having been given to the parties that this was to be a “de-novo” hearing, there is however one insurmountable hurdle. That is the fact that,at the time the ratepayer concluded that it would not be in its interests to respond to the appeal (as confirmed to the Tribunal in its agent’s letters of 16 August and 10 September 2013), ithad not been put on notice of this proposed supplementary issue.
5. In the letter dated 19 July 2013 that accompanied the notice of appeal, The VO said:

“In the notice of appeal I request a time extension to submit our Statement of Case. The grounds of my appeal will centre around fundamental principles of tenant’s works, minor alterations to the hereditament and I require additional time to investigate the conditions of the lease under which the hereditament is held and the cost of making the alterations. Also, due to the normal summer leave taking, the competing demands of Valuation Tribunal caseloads, resource availability is somewhat limited and therefore I would be grateful for a time extension until 18 October 2013.”